Bank of Hawaii Corporation — Q1 2019 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2019. Bank of Hawaii provides banking and financial services primarily in Hawaii, Guam, and other Pacific Islands. Results are compared with Q1 2018; balance-sheet changes are generally compared with December 31, 2018.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $124.8 million | $119.0 million, Q1 2018 |
| Net interest margin | 3.12% | 3.00%, Q1 2018 |
| Noninterest income | $43.7 million | $44.0 million, Q1 2018 |
| Noninterest expense | $93.1 million | $94.4 million, Q1 2018 |
| Provision for credit losses | $3.0 million | $4.1 million, Q1 2018 |
| Net income / diluted EPS | $58.8 million / $1.43 | $54.0 million / $1.28, Q1 2018 |
| Declared dividend per share | $0.62 | $0.52, Q1 2018 |
| Total assets | $17.45 billion | $17.14 billion, Dec. 31, 2018 |
| Loans and leases | $10.55 billion | $10.45 billion, Dec. 31, 2018 |
| Deposits | $15.27 billion | $15.03 billion, Dec. 31, 2018 |
| Cash and cash equivalents | $541.3 million | $526.0 million, Dec. 31, 2018 |
| Other debt | $110.6 million | $135.6 million, Dec. 31, 2018 |
| Shareholders’ equity | $1.27 billion | $1.27 billion, Dec. 31, 2018 |
Cash provided by operating activities was $17.1 million, versus $74.9 million in Q1 2018. Investing activities used $149.8 million, while financing activities provided $148.0 million. The company reported regulatory capital ratios of 12.75% CET1, 12.75% Tier 1, 13.87% total capital, and 7.46% Tier 1 leverage; it said the company and bank remained well capitalized. Available additional borrowing capacity was $2.3 billion from the FHLB and $551.2 million from the Federal Reserve.
Material changes and management commentary
- Net income increased 9% year over year and diluted EPS rose 12%. Management attributed stronger results principally to higher net interest income, lower credit-loss provision, and lower noninterest expense.
- Net interest income rose 5%; management cited loan growth and a higher net interest margin as loans made up a larger share of earning assets. Higher deposit rates raised funding costs: the average cost of interest-bearing deposits increased to 0.60% from 0.31% in Q1 2018.
- Loans grew 1% from year-end, mainly from consumer lending. Deposits grew 2%, led by consumer and commercial core deposits.
- Noninterest income declined slightly. Annuity and insurance income included a one-time third-party-administered insurance commission; Q1 2018 other income included a $2.8 million low-income-housing investment distribution. Q1 2019 securities losses included portfolio-repositioning sales and Visa-related fees.
- Noninterest expense declined 1%, partly because Q1 2018 included a $2.0 million legal reserve and because of lower credit-card costs following the sale of the MyBankoh Rewards Credit Card portfolio. Salaries and benefits rose 4%, including higher share-based compensation, health costs, and incentive compensation.
- Asset quality remained low in absolute terms, but nonperforming assets increased 39% from year-end to $17.9 million; the NPA ratio rose to 0.17% from 0.12%. The increase included higher commercial mortgage nonaccruals and additional foreclosed residential properties. Allowance coverage was 1.01% of loans, versus 1.02% at year-end.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance was provided. Management described Hawaii’s economy as healthy, cited a 2.8% statewide unemployment rate, and said tourism was expected to continue performing well; it also noted lower visitor spending in the first two months of 2019.
- Management’s interest-rate simulation projected higher net interest income in rising-rate scenarios and lower income in falling-rate scenarios. A flatter or inverted yield curve could reduce net interest income. These are model estimates, not guidance.
- The company plans to adopt CECL in Q1 2020. Its preliminary evaluation expects an effect on the financial statements, particularly the credit-loss reserve; the amount was not yet clear and will depend partly on portfolio composition and economic conditions at adoption.
- A customer class action concerning overdraft-fee practices remained pending and was being vigorously defended; management said the outcome was uncertain. The company cautioned that legal losses could exceed reserves if unexpected developments occur.
- The filing identifies LIBOR’s potential discontinuation after 2021 as a new risk affecting loans, derivatives, and other instruments tied to the benchmark. Other cited risks include Hawaii tourism or economic weakness, interest-rate changes, credit quality, regulation, litigation, cybersecurity, and operational disruptions.
- The company adopted lease accounting on January 1, 2019, recognizing $104.2 million of operating-lease right-of-use assets and $111.2 million of operating-lease liabilities at March 31; management said adoption did not materially affect income or cash flows.
- The board declared a subsequent quarterly dividend of $0.65 per share in April 2019. The company also repurchased 98,000 shares from April 1 through April 16; remaining repurchase authorization was $113.9 million at April 16.
Most important facts for investors to verify
- Whether loan growth and the 3.12% net interest margin persist as deposit pricing and funding costs rise.
- Whether nonperforming assets—especially commercial mortgage exposures—and net charge-offs remain controlled.
- The eventual CECL transition impact on reserves, earnings, and capital, which the filing does not quantify.
- How recurring noninterest income and expenses perform after excluding one-time commissions, prior-year distributions and legal reserves, and portfolio-sale effects.
- Potential exposure from the overdraft-fee litigation, mortgage representations and warranties, and the LIBOR transition.
- Whether capital ratios, liquidity, and planned dividends and buybacks remain consistent with the company’s balance-sheet and regulatory needs.